lecture 1 cashflow budget.ppt

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					              The Role of Budgeting
                • TEACHING OBJECTIVES
• 1. Introduce the purpose of budgeting.
• 2 Identify Cashflow Budgeting

• 3. Show the benefits & limits of budgets.
• 4. Show how the budgeting process works.
                        • 1. Introduction
• Once a farm has identified customer needs & changes
  through forecasting, it needs to determine if it can be met
• A . Knowing how to budget is certainly part of this process.
• B. A budget is a master financial plan or a "blueprint for
  action" in the future.
                  • 11. The Purpose of a Budget
•   A. A budget is a formal estimate of future revenues & costs
•   1.A detailed breakdown of all costs & revenues is necessary
    for attaining profit goals: Farms have to analyze operations
    to develop reliable estimates of revenues & costs.
•   2. If budgeting is done right, it forces better thinking about
    the farm's goals & purpose & how to achieve them. It forces
    mgmt to ask what to be done if certain target levels of sales
    & costs are to not being realized.
•   B. Making realistic budgets requires clear thinking; As a
    financial plan of firm’s expectations over time, it shld be a
    an assessment of what each part of the firm can accomplish
•    Make separate budgets for each part of business:
• 3. Follows with Cost & Expenses Preparation:
  Requires forecasting variable operating & fixed
  expenses. It uses accounting principles in its
                 • V. The Cash Flow Budget
• Objectives
• 1 To identify cash flow budgeting as a tool for financial
  decision making & business analysis
• 2 To understand structure & component of cash flow budget
• 3 Illustrate the procedure for completing a cash flow budget
• 4 To describe both the similarities and differences between
  a cash flow budget and an income statement
• 5 Discuss advantages & potential uses of a cash flow budget
• 6 To show how to use a cash flow budget when analyzing a
  possible new investment
            • Characteristics of a Cash Flow Budget
• 1. Records sales, & expenses according to when they are received or
  paid:CFB shows amount & timing of cash expected to flow in & out
  of the firm during budget period. –i.e. its a summary of projected cash
  inflows & outflow for a business over a given period of time in an
  organised time sequence.
• a. Cash Inflows: Come from sales, services, borrowing, sale of capital
  items, & from payments on accounts receivable.
• b. Cash Outflows: Include payments for goods & services purchased,
  debt, taxes, salaries, capital assets.

                                      Cash inflows
                                   (sales, new loans etc)

                               Farm Business

•                                  Cash outflows
                                   (expenses, debt payment
                                   loans payments etc)
• 2. CFB shows Cash Receipt & Disbursements: Shows when
  cash shld be available & when cash payments must be made
  – i.e. assist mgmt plan when cash will be in surplus/ deficit

• 3. CFB is a forward way of cash planning. It serves as a
  tool for investing excess cash & borrowing needed cash:
  CFB allows mgmt to invest surplus cash to earn extra
  income or help to decide when & how much to borrow in
  deficit periods & ability to repay loanns
             • Structure Of A Cash Flow Budget
• Table 1 a condensed form of structure & format of a CFB is
              Table 1 Simplified Cash Flow Budget
                                                  Time Prd 1   Time Prd 2
• 1. Beginning cash balance                        $1,000        $ 500
• Cash inflow (Sources):
  2. Farm product sales                               $2,000    $12,000
  3. Capital sales                                         0      5,000
  4. Miscellaneous cash income                             0        500
  5. Total cash inflow                                $3,000    $18,000
•     Cash outflow (Uses):
  6. Farm operating expenses                         $ 3,500    $ 1,800
  7. Capital purchases                                10,000          0
  8. Miscellaneous expenses                              500        200
  9. Total cash outflow                             $14,000      $ 2,00
• 10. Cash balance (line 5 - line 9)                 -11,000    16.000
  11. Borrowed funds needed                         $11,500           0
  12. Loan repayments (principal and interest)             0    11,700
• 13. Ending cash balance (line 10 + line 11 - line 12) 500       4,300
• 14. Debt outstanding                               $11,500    $     0
                    • Potential Sources of Cash:
•   1. The beginning cash balance or cash on hand
•   2. Product sales or cash revenue from business operation
•   3. Capital sales - cash received sale assets like land,
    machinery, breeding livestock, & dairy cattle
•   4. Non-business cash receipts – such as non-farm cash
    income, cash gifts, & other sources of cash
•   5. New borrowed capital or loans received
•   The last source is not included in the cash inflow section
    because borrowing requirements are not known until the
    cash outflows are matched against the cash inflows.
•   In prd 1, total cash inflow of $3,000 includes beginning
    cash balance. The total cash outflow = $14,000. Projected
    cash balance = -$11,000. This deficit will require borrowing
    $11,500 to provide a $500 minimum ending cash balance.
                         • Uses of Cash:
•   1. Farm operating expenses – i.e. the usual cash expenses
        incurred in producing the farm revenue
•   2. Capital purchases – i.e. full purchase price of new capital
    assets e.g. land, machinery, & dairy/breeding livestock
•   3. Non-business & other expenses – i.e. cash used for living
    expenses, income & social security taxes, etc.
•   4. Principal payments on debt – i.e. Interest payments shld
    also be included here unless they were included as part of
    the operating expenses.
                      • Ending Cash Balance:
•   Difference btwn total cash inflows & total cash outflows for
    any time period.
            • Constructing a Cash Flow Budget
• The following steps summarize the process & info needs.
   – 1. Develop a business plan. It’s impossible to estimate cash
     revenues & expenses without knowing what to be produced.
   – 2. Estimate crop pdn & livestock feed reqr’mts. Most, if not all, of
     this info should be found in the whole farm plan.
   – 3. Estimate cash receipts from livestock enterprises. include sales
     of livestock as well as livestock products such as milk & wool.
   – 4. Estimate cash crop sales.
   – 5. Estimate other cash income. Include interest & dividends on
     investments & non-farm sources of cash revenue.
   – 6. Estimate cash operating expenses.
   – 7. Estimate personal & non-farm cash expenses. e.g. cash needed
     for living expenses, income & social security taxes.
   – 8 Estimate purchases & sales of capital assets e.g. purchase price
     of buildings, breeding livestock, land to be purchased & total cash
     to be received from capital assets sale
   – 9. Record scheduled principal/interest payments on existing debt.
                 • Uses For A Cash Flow Budget
•   Primary use of CFB is to project timing & amount of new
    borrowing & loan repayment a business will need during the
    year. Other uses and advantages are:
•   1. CFB can prevent excessive borrowing & shows how
    repaying debts ASAP will save interest.
•   2. CFB may suggest ways to rearrange purchases &
    scheduled debt repayments to minimize borrowing.
•   3. CFB combines both business & personal financial affairs
    into one complete plan.
•   4. A lending agency can offer financial advice & spot
    weaknesses/strengths in a business based on completed CFB
•   5. Can assist managers to obtain discounts on input
    purchases by making a prompt cash payment.
•   7. CFB can help spot imbalance btwn short, intermediate &
    long-term credit and suggest ways to improve the situation.
              • VIII.     Budget Benefits
• A. It helps managers better understand their business
• B. It provides a "yardstick" by which business
  performance can be measured by others.
  – 1.     should be checked frequently to see progress
  – 2.     if negative deviations are found, it permits quick
           corrective action before things get worse
                     • IX. Summary
• A. Budgeting is a critical step in business planning
• B. It puts ideas into numbers for profit or loss
• C. Budgets are valuable tools in good management

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